Inflation is the persistent rise in the general price level in an economy over a certain period of time. There are two types of inflations which are listed below;
1) Cost push inflation
2) Demand pull inflation
The earlier one is in which the price of money rises in accordance with the increase in cost of production of goods, the main reason of it is wage price spiral. The latter occurs due to increase in the disposable income of people. Both have their own disadvantages, they inflation decreases the worth of money and is pretty harmful for an economy.
Islamic economy is different as everything is done in a different manner, efficient allocation of resources is done in order to avoid inflation in an Islamic economy, and there are various ways to tackle inflation. How Islamic economy deals with inflation, brings it to a halt through the following ways;
1) Prohibition of interest and speculation
2) Ban on luxurious consumption
3) Just wage
4) Increase in supply of goods
5) Eradication of business malpractices
Interest is the cost of borrowing, by not allowing interest, the cost of investments would decrease automatically, and less would now be passed on to the consumers through cheaper rates. Wage price spiral is the main cause of cost push inflation, this mainly occurs due to trade unions in order to safeguard the interests of their members. An equilibrium price when set when the forces of demand and supply meet decreases the price as there is no longer excess demand which helps to shoot the price.
Inflation in Islamic economy can be controlled through fiscal measures as well, by issue of zakat certificate which allows proper distribution of income in accordance with the qarz-e-Hassan ratio. Debt ratio is altered in order to discourage the interest system and excess money in the market, proper distribution of zakat allows prosperity in the poor income earners lives plus closes down the gap between the classes. In inflation in Islamic economy there is a significant role of the state to control the inflation which is mainly in the form of following ways;
1) Price control
2) Buffer stock
3) Rationing
4) Confiscation of stock holdings
5) Liberal imports
Price controls are in the form of maximum and minimum prices being set for certain commodities or services. Buffer stock is the excess material for example wheat stored to cope up with unforscenic weather changes for example a drought and avoiding black market and consumer exploitation. The imports are lowered down as much as possible in order to keep the balance of payments plus the value of money intact other than degrading and losing its value against foreign currencies.
If all these measures are followed and applied like in Islamic economy it couldn’t be run any better and while avoiding all the barriers and it couldn’t be in better control. Because all the unfair and unjust practices for example monopolies are broken down to safeguard the consumers plus keeping the price level maintained, so we can say that inflation in Islamic economy can be negligible if the right steps are followed.
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